25 June 2011

Weekly Fund Flow Tracker - Back to square one :: Macquarie Research

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Weekly Fund Flow Tracker
Back to square one
Local exchange data: YTD cumulative buying back to zero
 Foreign net-selling in Northeast Asia eased WoW. For the week ending
Wednesday, June 22, foreign net-selling eased to -US$1.4bn from last week’s
-US$2.2bn for the aggregate of the six Asia ex-Japan markets where data is
available (i.e. Korea, Taiwan, India, Thailand, Indonesia and the Philippines) -
- helped by less intense selling in Taiwan (-US$486m vs. -US$1.14bn) and
Korea (-US$473m vs. -US$883m). Still, the past week’s foreign selling brings
Asia ex-Japan’s YTD cumulative total back into negative territory, with the
cumulative inflows since late March now having been fully reversed.
 TIPs buying sustains while India outflows intensify. Net-buying in the
Philippines strengthened WoW to US$8m from US$1.5m. Indonesia recorded
net-buying of US$78m with momentum accelerating towards the end of the
week. Net-selling in Thailand continued to ease (-US$68m vs. -US$194m).
On the other hand, India recorded foreign net-selling every single day during
the week, totalling -US$453m, more than double last week’s -US$203m.
 Selling in Japan intensified. For the week ending June 17, Japan did not
escape the outflows recorded in the Asia ex-Japan markets last week: netselling increased to -US$1.8bn from -US$498m the week before.
 Frontier markets net-sold. All three frontier markets where high-frequency
foreign stock buying data is available (i.e. Vietnam, Pakistan and Sri-Lanka)
recorded decreased net-buying/increased net-selling, bringing the aggregate
down to -US$5.3m from positive US$0.5m the week before.
Fund Subscription data: GEMs rebound, Asia still sluggish
 GEM funds net-subscriptions a 7-week high. Despite managers’ selling of
individual Asian stocks, weekly net-subscriptions to Global Emerging Market
funds actually rebounded to US$902m, vs. YTD average net-redemptions of -
US$121m. The lack of a firm trend in weekly GEM subscriptions since May,
however, still seems to signal a lack of strong conviction among investors.
 Emerging Asia: Taiwan sidesteps pan-Asian fund redemptions.
Moreover, weekly net-redemptions at pan-regional Asia ex-Japan funds in
particular (at -US$412m) hit their highest level since late March. Of note,
though, Taiwan-, Indonesia-, and Philippine funds received positive net
subscriptions at the single-country-fund level.
 Developed Asia: weekly redemptions continue. Weekly net-redemptions at
Japan-focused funds of -US$250m marks the 7th week of consecutive
outflows, while redemptions eased WoW for Asia-Pacific Funds (which
combine Australia and New Zealand with Japan and emerging Asia).
 Monthly portfolio allocation data suggests continued rotation into China,
Discretionary. EPFR survey-based consensus portfolio positioning data for
end-May show increased weightings in China (by 0.4ppt to +1.9% vs. the
MSCI Asia ex-Japan benchmark) and Malaysia (by 0.6ppt to +0.4%), offset
mainly by decreased weighting in Hong Kong (-0.9ppt to -0.5%). Sector-wise,
increased Overweights in Consumer Discretionary (by 1.0ppt to +3.2% vs. the
benchmark), Industrials (by0.4ppt to +1.6%) and a decreased Underweight in
Tech (up by 0.4ppt to -0.3%) were balanced by decreased Overweights in
Financials (by 1.1ppt to +0.7%) and Materials (by 0.7 to -0.3%). [See Figure
10 for full data set.]

Macquarie Research:: Indian Cement Sector - Investigations, oversupply - significant risks

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Indian Cement Sector
Investigations, oversupply - significant
risks
Investigation intensifies, downside risk
Competition Commission of India (CCI) has been enquiring into sharp cement
price increases given low demand for quite some time. Now the government has
broadened the investigation by getting Securities Fraud Investigation Officer
(SFIO), Department of Corporate Affairs in the ring. Global experience suggests
that penalties, whenever imposed, have led to underperformance of stocks. In
recent cases (2009), we saw penalties being imposed in our neighbouring
country Pakistan. CCI can levy penalty up to 10% of revenue or 3x profits for
years under consideration.  Stocks have corrected from peaks, but we still
recommend reducing exposure.
Structural bull cycle at least 2yrs away
Cement prices have hit an all time high driven by supply discipline, supported by
rising costs and at times helped by constraints on logistic infrastructure.
However, industry fundamentals remain weak with capacity utilisation below
75%, clinker inventory at 8yr high and demand subdued at 5-6% down from 3yr
average of 10%. We believe that cement price has held up stronger than
anticipated, but now have peaked out.
Cost rise is structural, margins dependent on cement price
For the first time cement companies are seeing all round inflation across all cost
centres. Energy costs which account for 30% of the costs are increasing due to
rising imported coal prices as well as due to recent hike by Coal India. Transport
costs have been on the rise, though their full impact has not yet been felt as
diesel prices are still subsidised. Staff costs have been rising in double digits,
much higher than volume growth of 9-10% and eating into the margins. Raw
material costs have also risen sharply, as most companies are now forced to pay
for fly-ash. To add to the misery, we see no major easy cost saving potentials, as
captive power plants and blending ratios, which were the main source of cost
reduction in last decade, have been exhausted. The next big potential to reduce
costs is captive coal mines, and we believe this is at least 3yrs away.
Valuations to see de-rating
We do think that it might be too early to buy for structural tightness, as
oversupply issues will not be resolved at least till 2013. While profits look
reasonable, the risks are very high given the investigation and also due to
increased volatility in cement prices. We think market will assign lower multiple
to account for increased risk.  We have introduced a 15% discount to our NPV
and cut our target prices for all stocks.
ACEM and ACC: Fully priced in, merger delayed, likely to grow slower.
UTCEM: Fully valued, but one to own for medium term due to superior growth.
Grasim: Cheaper way to own UTCEM.
 India Cement: Best play as it looks to reduce costs by Rs300/t.

The Visible Hand - Now comes intervention in oil markets :: Macquarie Research

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The Visible Hand
Now comes intervention in oil markets
Event
 The International Energy Agency announced a release of oil reserves.
Impact
 Concern over rising commodity prices is now being expressed in many forms.
Warnings about commodity ETFs in April and the World Bank’s proposed
hedging of food prices by poor countries are just two examples of these
concerns.
 It has been suspected for some time that the US in particular wants a lower oil
price. The political imperative to boost US growth well before the elections of
November 2012 has added a sense of urgency.
 Intervention in the oil market is just more one sign of the determination of key
policymakers in the US to boost economic growth. This will be an important
offset to tighter monetary policy in emerging markets.
Analysis
 The International Energy Agency (IEA) announced that 60 million barrels of oil
will be released over the next 30 days from the emergency stocks of its
members. This was rationalised on the view that the absence of Libyan oil
from the market could create a problem as demand for oil rises over coming
months.
 It is doubtful that this is the full story. Over recent weeks there have been
veiled hints from the US that it could authorise a release from its Strategic
Petroleum Reserve. Saudi Arabia has also made it clear that it wanted to
boost output to lower the price of oil. This would not be the first time that the
Americans and the Saudis have got together to control the oil price although
there is no real evidence yet of such coordination.
 There is certainly a compelling political reason for the US to push oil prices
lower. Weaker economic data in the US recently must be causing some
concern within the Obama administration. Getting re-elected in November
2012 is not going to be easy. Getting the US economy up to full steam will be
imperative and policies will need to be in place now to ensure stronger growth
in 2012.
 One question that could be asked of the IEA is why there was no release of
reserves in 2008. At that time the prices of both West Texas Intermediate
(WTI) and Brent were considerably higher than they are at the moment. As
well there was a large fall in the WTI price in early May 2011 and so the
pressure for a release of emergency stocks should have eased if anything.
 One possible answer is that policymakers are now more sensitive to the risks
to economic growth in 2011 than they were in 2008. This sensitivity may have
been heightened by recent softer economic data. But it is also worth bearing
in mind that in 2008 the US president was not standing for re-election and the
political dynamics are very different in 2011.

Thermax : Near term headwinds : CLSA

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Near term headwinds
Thermax’s order book at FY11-end fell by 5% YoY, as it only won a single
large project, on account of delays in order finalisations and more intense
competition. Margins are likely to slide downwards, on account of more
EPC work, higher commodity costs and aggressive bidding. We moderate
our order flow assumptions and Ebitda margins assumptions, resulting in
a 6-9% cut in FY12-13 EPS. However, valuations look reasonable, with
the stock trading at a 16.4x FY12 and 13.8x FY13 PE, c.20% discount to
its five year average. Maintain O-PF with a reduced target of Rs680/sh.
Strong execution but poor order flows in FY11
Strong execution boosted Thermax’s FY11 revenue by 58% YoY to Rs53bn.
Ebitda margins stood at 11.3% (down 40bps YoY), broadly in-line with our
expectations, as the company undertook more EPC work. However, order
inflows fell by 5% YoY, to Rs60bn, on account of only one large project win - a
72MW combined-cycle plant (Rs5.8bn). It lost two large projects (4 x 300MW
SKS Ispat EPC orders and a 270MW Meenaxi order) to Cethar Vessels in
FY11. By contrast, Thermax had announced Rs19.7bn in orders in FY10.
Gradual pick up in orders; expect margins to slide
Thermax won two large projects, aggregating Rs7.7bn, at the opening of
FY12, which should somewhat ease investor concerns regarding order delays.
Since the company can now take on EPC projects for IPP and supply utility
size boilers, versus only catering to captive power plants, its business
becomes relatively less cyclical. Moreover, while JNNURM projects saw
significant delays in FY11, a pick up in FY12 helps order flows in the
Environment segment. Consequently, we forecast 8-11% YoY order growth for
FY12-13, albeit lower than our earlier estimates. However, intense
competition, more EPC work and higher commodity costs could squeeze
margins; we lower our Ebitda margin forecast by 30-70bps (to 10.5-10.7%).
Coupled with 0-6% lower revenue, the shift leads to 6-9% cut in EPS.
Maintain O-PF with a reduced target
We believe near-term delay concerns and intensifying competition are
reflected in Thermax’s 16.4x FY12 and 13.8x FY13 PE valuation (about a 20%
discount to its five-year average). Strategic enhancements allow the company
to tackle larger projects such as ESP supply, heating and cooling solutions for
combined-cycle gas developments and environmental products. We maintain
our Outperform call but cut our target from Rs805 to Rs680 (15x FY13 PE).

Thermax : Near term headwinds : CLSA

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Near term headwinds
Thermax’s order book at FY11-end fell by 5% YoY, as it only won a single
large project, on account of delays in order finalisations and more intense
competition. Margins are likely to slide downwards, on account of more
EPC work, higher commodity costs and aggressive bidding. We moderate
our order flow assumptions and Ebitda margins assumptions, resulting in
a 6-9% cut in FY12-13 EPS. However, valuations look reasonable, with
the stock trading at a 16.4x FY12 and 13.8x FY13 PE, c.20% discount to
its five year average. Maintain O-PF with a reduced target of Rs680/sh.
Strong execution but poor order flows in FY11
Strong execution boosted Thermax’s FY11 revenue by 58% YoY to Rs53bn.
Ebitda margins stood at 11.3% (down 40bps YoY), broadly in-line with our
expectations, as the company undertook more EPC work. However, order
inflows fell by 5% YoY, to Rs60bn, on account of only one large project win - a
72MW combined-cycle plant (Rs5.8bn). It lost two large projects (4 x 300MW
SKS Ispat EPC orders and a 270MW Meenaxi order) to Cethar Vessels in
FY11. By contrast, Thermax had announced Rs19.7bn in orders in FY10.
Gradual pick up in orders; expect margins to slide
Thermax won two large projects, aggregating Rs7.7bn, at the opening of
FY12, which should somewhat ease investor concerns regarding order delays.
Since the company can now take on EPC projects for IPP and supply utility
size boilers, versus only catering to captive power plants, its business
becomes relatively less cyclical. Moreover, while JNNURM projects saw
significant delays in FY11, a pick up in FY12 helps order flows in the
Environment segment. Consequently, we forecast 8-11% YoY order growth for
FY12-13, albeit lower than our earlier estimates. However, intense
competition, more EPC work and higher commodity costs could squeeze
margins; we lower our Ebitda margin forecast by 30-70bps (to 10.5-10.7%).
Coupled with 0-6% lower revenue, the shift leads to 6-9% cut in EPS.
Maintain O-PF with a reduced target
We believe near-term delay concerns and intensifying competition are
reflected in Thermax’s 16.4x FY12 and 13.8x FY13 PE valuation (about a 20%
discount to its five-year average). Strategic enhancements allow the company
to tackle larger projects such as ESP supply, heating and cooling solutions for
combined-cycle gas developments and environmental products. We maintain
our Outperform call but cut our target from Rs805 to Rs680 (15x FY13 PE).

Thermax : Near term headwinds : CLSA

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Near term headwinds
Thermax’s order book at FY11-end fell by 5% YoY, as it only won a single
large project, on account of delays in order finalisations and more intense
competition. Margins are likely to slide downwards, on account of more
EPC work, higher commodity costs and aggressive bidding. We moderate
our order flow assumptions and Ebitda margins assumptions, resulting in
a 6-9% cut in FY12-13 EPS. However, valuations look reasonable, with
the stock trading at a 16.4x FY12 and 13.8x FY13 PE, c.20% discount to
its five year average. Maintain O-PF with a reduced target of Rs680/sh.
Strong execution but poor order flows in FY11
Strong execution boosted Thermax’s FY11 revenue by 58% YoY to Rs53bn.
Ebitda margins stood at 11.3% (down 40bps YoY), broadly in-line with our
expectations, as the company undertook more EPC work. However, order
inflows fell by 5% YoY, to Rs60bn, on account of only one large project win - a
72MW combined-cycle plant (Rs5.8bn). It lost two large projects (4 x 300MW
SKS Ispat EPC orders and a 270MW Meenaxi order) to Cethar Vessels in
FY11. By contrast, Thermax had announced Rs19.7bn in orders in FY10.  
Gradual pick up in orders; expect margins to slide
Thermax won two large projects, aggregating Rs7.7bn, at the opening of
FY12, which should somewhat ease investor concerns regarding order delays.
Since the company can now take on EPC projects for IPP and supply utility
size boilers, versus only catering to captive power plants, its business
becomes relatively less cyclical. Moreover, while JNNURM projects saw
significant delays in FY11, a pick up in FY12 helps order flows in the
Environment segment. Consequently, we forecast 8-11% YoY order growth for
FY12-13, albeit lower than our earlier estimates. However, intense
competition, more EPC work and higher commodity costs could squeeze
margins; we lower our Ebitda margin forecast by 30-70bps (to 10.5-10.7%).
Coupled with 0-6% lower revenue, the shift leads to 6-9% cut in EPS.
Maintain O-PF with a reduced target
We believe near-term delay concerns and intensifying competition are
reflected in Thermax’s 16.4x FY12 and 13.8x FY13 PE valuation (about a 20%
discount to its five-year average). Strategic enhancements allow the company
to tackle larger projects such as ESP supply, heating and cooling solutions for
combined-cycle gas developments and environmental products. We maintain
our Outperform call but cut our target from Rs805 to Rs680 (15x FY13 PE).

Shriram Transport Finance - Gearing up for changes ahead :: UBS

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UBS Investment Research
Shriram Transport Finance 
Gearing up for changes ahead 
 
„ Event: management meet to discuss potential changes
We met Mr R. Sridhar, CEO to discuss the recent regulatory changes and possible
changes ahead. Management believes, looking at the spirit of the RBI gesture of
removing priority-sector status for on-balance sheet funding, it is illogical that the
status will continue for off-balance sheet funding. Management is working on  a
contingency plan to offset the absence of securitisation. We expect growth to slow
down to the lower end of the 15-20% guidance in FY12 as the rates are impacting the
purchase decisions of truck operators. Healthy monsoons and agricultural production
could provide upside.
„ Impact: lowering estimates on lower growth, lower securitisation income
We lower our loan growth estimates to a 16% CAGR over FY12-13 from 19% earlier,
which is at the lower end of Shriram Transport Finance (SHTF) guidance. We lower
our securitisation income estimates by 8% in FY13, while maintaining FY12 estimates
due to accrued income (~Rs30bn). In case SHTF is able to execute its contingency
plans successfully to mitigate the impact, there could be upside risk to our estimates.
„ Action: maintain Buy with a lower PT of Rs800 (from Rs950 earlier)
We lower our price target 15% to Rs800 on account of the 3%/9%/7% cut in
FY12/13/14 EPS estimates. The impact of the decline in securitisation income will
show up with a lag; we have also raised our provisioning estimate in anticipation of
slowing macro. Our estimates imply average RoE of 25% and an EPS CAGR of 17% in
FY12-13.
„ Valuation: valuations offset regulatory overhang
Our price target, derived using a residual income model, implies 3x FY12E book. In
our view, current valuations offer an attractive entry point. We reiterate our Buy rating.


Q Shriram Transport Finance
Shriram Transport Finance Corporation Ltd, established in 1979 and listed in
June 1999 on the NSE, is part of the Chennai-based Shriram Group. The Group
has a 41% stake in Shriram. The company is engaged in financing new and
second-hand commercial vehicles, commercial passenger vehicles, three
wheelers, tractors and construction equipment. Shriram Transport Finance has
pan-India coverage with a network of 484 branches and 60 strategic business
units. It raised Rs5.8bn through a Qualified Institutional Placement in January
2010.
Q Statement of Risk
We believe a slowdown in economic growth, industrial production and
consequent decline in the freight market would impact borrowers’ ability to
repay, in addition to impacting the company’s growth outlook. A change in
securitisation guidelines is also a risk, in our view

UBS :: Infosys -Addressing the key concerns; target of Rs3,550.

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UBS Investment Research
Infosys Ltd
Addressing the key concerns on Infosys
 
„ Will FY12 revenue guidance be difficult to beat?
Infosys has embarked on a company-wide reorganisation as part of its Infosys3.0
initiative, which is expected to be completed by July 2011. There are concerns that
this will impact near-term revenue growth. We expect Infosys to continue its track
record of beating its FY12 revenue guidance of 18-20% YoY growth, but expect
the extent of beat to be lower due to the ongoing internal changes in the company.
„ Is the margin lead over peers finally eroding?
Infosys margin guidance of a 300bp decline in FY12 has raised concerns that its
lead over peers is eroding. We believe that all large Indian vendors will lose 300-
400bp in operating margin over the next five years, and we expect Infosys to
maintain a lead over its competitors. We also view Infosys’ FY12 margin guidance
as being conservative, with ample room for upside.
„ What are the catalysts for stock price performance?
We expect Q1 to be the last muted quarter for Infosys, and believe that strong Q2
guidance, followed by a beat would act as positive surprises for the stock. Betterthan-expected Q1 margin performance (we expect a 290bp drop in EBITDA) could
also help assuage margin concerns and act as a trigger for stock upsides.
„ Valuation: maintain Buy, negatives priced in, downside protection likely
We believe the negatives are fully factored into the current stock price, with
valuations at a 15% discount to 5-year average trading multiples. We see limited
risk to our earnings estimates and expect better downside protection in a volatile
market. We maintain our Buy rating with a 1-year view and DCF-based price
target of Rs3,550.

Buy Havells:: Stock correction on Philips guidance cut unwarranted; JPMorgan

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Havells India Ltd
Overweight
HVEL.NS, HAVL IN
Stock correction on Philips guidance cut unwarranted;
Reiterate OW


 Read through from  Philips guidance cut: HAVL stock is down about
5% following profit warning issued by Philips (covered by our European
analyst Andreas Willi) on account of expected slowdown in its lighting
and consumer businesses in Western Europe. Philips expects low single
digit  sales  in  the  lighting  segment  (JPM  2011e  is  3%,  2012e is  5%).
According  to  our  European  Capital  Goods  Analyst:  “We  see  this
warning  as  partly  company  specific,  but  with  the  miss  on  revenue  in
early cycle lamps and consumer business is also a warning signal about
demand.” Link to our European analyst note on 23/06: Philips: Another
big downgrade and warning signalabout demand; cutting TP to €20.5
 We  don’t  see  risk  to  HAVL  estimates: We  estimate  that  Europe
accounts  for  about  31%  of  HAVL  consolidated  revenues  and  its
contribution will only decline going  forward. We  do not see risk to  our
estimates  for  HAVL  on  account  of  Philips  guidance  cut.  We  are
estimating  1.5% revenue  growth for  Sylviana in Europe in FY12  (all
pricing  driven).  In  addition,  Sylvania's  product  portfolio  is  not  fully
comparable  to  Philips,  as  Sylvania  does  not  sell  consumer  electric
products and has a very small presence in LED lighting
 HAVL  management  reiterates  guidance:  We  spoke  to  HAVL
management, who  reiterated their guidance  for Sylvania, guiding at  flat
growth  in  Europe  and  between  15%-20%  growth  in  Latin  America.
(Europe is 60% of Sylvania revenues). Management expects to maintain
about  8%  EBITDA  margins  for  Sylivania  in  FY12.  Management  also
stated that their performance in Europe is tracking as per their budget and
they do not see any risk to their guidance.
 Maintain  OW,  stock  weakness  enhances  buying  opportunity. We
believe that the weakness in HAVL  enhances stock buying opportunity.
HAVL  is  currently  trading  11.6x FY12E  PE,  offering  EPS  CAGR  of
36% over FY11-FY13E with FY12E ROE of 40%. Reiterate Overweight
rating.

Dish TV: Arpu will only grow :target price Rs93 ::CLSA

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Arpu will only grow
With content offering more than 25% ahead of its direct-to-home (DTH)
competitors, growing efforts on HDTV and rising media consumption with
high affordability, Dish TV is set to enjoy deeper market penetration as
well as increase in Arpu. We raise our Dish TV Arpu assumptions to
9%Cagr over FY11-13CL, even as the prevalent regulatory curbs stay and
this takes our Ebitda Cagr estimate to 67% and our DCF-based target
from RS85 to Rs93. We maintain our BUY call and expect further upside
potential from pending legislation on digitisation and licence-fee cuts.
Largest transponder capacity, lead in HDTV.
Dish TV has the highest capacity in the DTH sector with 17 transponders,
against Tata Sky’s 11 and other key operators having 7-10 each. The
company provides 267 standard-definition (SD) and 35 high-definition (HD)
channels, which make its content offering more than 25% ahead of its
competitors. Besides leading in content and HDTV offering, its value-addedservice (VAS) offers are also competitive. The operator has reduced the
price of its HDTV set-top box (STB) by about 20% to Rs2,990 and a package
of 20 HD channels at Rs450 (3x the current Arpu) or Rs550 for a package of
35 HD channels. This, and an extensive promotional effort, has allowed its
subscriber-pull HD to contribute 7% of net additions, and management
targets the number to reach 15% in 12 to 18 months.
High affordability increasing media consumption.
Meanwhile, for the basic service with an upfront STB cost of less than
Rs1,200 (US$25) and monthly spending of Rs150 (US$3), India has the
lowest DTH Arpu worldwide and there is high affordability of the service.
Indian households spend less than 1% of monthly income on DTH/cable
services (primary means of entertainment) against 7% in Asia on leisure
and entertainment. Also, a breakdown of Indian household consumption
across various categories, such as transport at 18% and communications at
2% (doubled since 1991 despite a 97% reduction in tariffs), suggests family
spending on media is low. Based on our Mr & Mrs Asia report, discretionary
spending by the Indian middle class is set to more than double to US$442bn
by 2015 and is witnessing a 12-15% wage Cagr. As such, media
consumption will only grow, further enabling DTH Arpu expansion.
We forecast a 9% Arpu and 67% Ebitda Cagr.
We raise our Dish TV Arpu assumption from Rs150 in 4QFY11 to Rs166 by
FY13, driven by increased media consumption, package choices, enhanced
content as well as the takeup of HD/VAS even as the prevalent regulatory
curbs on wholesale/interconnect rates stay. This will take our forecast Ebitda
Cagr from 63% to 67% over FY11-13CL and an increase in our DCF-based
target price from Rs85 to Rs93, implying 17% upside. We maintain BUY with
further upside potential from pending legislation on digitisation and licencefee cuts.

Indian financials:: Trend reversal ::CLSA

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Trend reversal
We expect the gap between credit and deposit growth to reverse in FY12 with
deposit growth (21%) outpacing credit growth (18%). Margins will compress
in next 2-3 quarters and pressure would be more for banks with lower CASA
ratio, higher share of wholesale deposits and banks with sizable ALM
mismatch as on Mar-11. We see risk of +50bps fall in spreads; but margins
will start expanding in 2HFY12 as in phase 3 of the cycle, banks focus more on
NIM v/s growth. Moderation in credit growth and pick-up in deposit growth
will lower incremental LDR and ease liquidity. This could drive correction in
short term rates and make yield curve bit steeper. As loan demand softens,
banks with high CASA ratio should gain market share. Over FY12-13, 100bps
lower than expected credit growth would impact earnings by 1-3%.
Deposit growth will outpace credit demand
q In FY11, credit growth of 21% was slightly higher than RBI’s projection of 20%
and deposit growth of <16% was below projection of 17%. However, the
500bps gap between credit and deposit growth was highest in 5 years.
q In FY12 we expect this trend to reverse as we see pressure on credit demand
and tailwinds for pick-up in deposit growth.
q Credit demand may weaken due to (1) lower demand for working capital
financing– following correction in commodity prices (2) slowdown in infra and
capex loans and (3) lower retail credit demand.
q On other hand, deposit inflows may trend-up due to (1) hike in rates (2) rise in
share of bank deposits within household savings (sale of insurance and mutual
funds have slowed) and (3) faster compounding of deposits.
q We expect credit growth in FY12 to be 18% (lower than RBI’s projection of
19%) and deposit growth to be 21% (higher than RBI projection of 17%).
q Our analysis of interest rate cycles over the past eight years also indicates
towards moderation in credit growth and pick-up in deposit growth.
Liquidity will improve, yield curve to become steeper
q While the banks continue to borrow from RBI (reverse repo at Rs1tn), we
believe this could decline as advance tax collections flow back.
q Rates on certificate of deposits have corrected by 30-100bps and may contract
further with improvement in liquidity.
q While we expect some hike in lending rates, retail term deposit rates could
remain relatively stable at current levels.
q The yield curve should become a bit steeper with correction in short term rates
and some upward pressure at the long-end.
Risk of +50bps contraction in spreads, but new loans are NIM accretive
q Over the next 2-3 quarters we expect spreads to be under pressure as the hike
in deposit rates has been more than that for loans.
q Banks with higher share of wholesale deposits and mismatch in maturity profile
will see greater pressure- resulting in +50bps contraction in NIMs (offset to
some extent by capital infusion); smaller PSU banks are more vulnerable.
q We expect margins to expand in 2HFY12 as recent hike in loan rates have been
more than hike in deposit rates and quicker than in previous cycle.
High CASA banks would gain market share as loan growth moderate
q Every 100bps lower loan growth can impact earnings by 1-3% over FY12-13.
q As loan demand slows, banks with high CASA ratio and hence lower cost of
funding can gain market share. As a result, the gap between credit growth of
high CASA banks and the sector can widen.
q While banks are not yet worried about asset quality pressures, we believe that
banks with lower share of risky exposures will continue to outperform.
q HDFC Bank and ICICI Bank stay as our top picks.
q Improvement in liquidity can lead to some bounce-back in low CASA banks and
NBFCs like HDFC, IDFC, PFC and REC.

June 24: News headlines: Corporate , Economic and political ::CLSA,

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News headlines: Corporate
‰ In a letter to the Oil Ministry, Reliance has reportedly alleged that
misunderstanding of legal and contractual issues by CAG in its
report had hurt the company's reputation. (ET)
‰ Coal India has sought clarity from the government on whether it
is allowed to buy stakes in unlisted firms abroad. (BS)
‰ Honda Motorcycles & Scooters India (HMSIL) has plans to
invest Rs14bn over the next two years to ramp up its annual two
wheeler manufacturing capacity. (BS)
‰ As per sources,  Jaypee Group is considering to diversify into
aviation with an initial investment of Rs2.5bn to start a budget
airline to operate in some states of North India. (BS)
‰ SEBI has ordered two Sahara Group companies to refund at least
Rs48.4bn collected under debenture schemes to investors. (BS)
News headlines: Economic and political
‰ The food price index rose 9.13%YoY and the fuel price index
climbed 12.84%YoY for the week ended June 11.  (FE)
‰ The government has allowed additional sugar exports of 0.5mt in
the current year. (ET)
‰ An emergency meeting of the Empowered Group of Ministers has
been convened today to decide on hike in diesel, kerosene and LPG
prices. (ET)

‰ Domestic air traffic in Jan-May rose 17.6%YoY to 24.5 million, with
Jet Airways continuing to hold the largest market share. (FE)
‰ As per sources, the centre is likely to come out with a uniform and
market-friendly stamp duty structure for transactions in the capital
and commodities markets within two weeks. (BS)
‰ Rejecting the recommendations of the Forest Advisory Committee,
Environment Ministry today gave  its approval to open up Tara,
Parsa East and Kante Basan coal-blocks in the Hasdeo-Arand forest
region of Chhattisgarh. (BS)
‰ As per sources, a Group of Ministers on Coal has asked the Ministry
of Environment and Forests to outline the current status of eight
blocks, which have been allotted to firms like ADAG, Essar, Adani
and Birla Group at its next meeting, scheduled on July 2. (BS)
News headlines: Corporate
‰ GM has shelved plans to launch the small car in India that was
planned to take on Tata Motors' 'Nano', citing viability issues.
(BS)
‰ Yash Birla Group’s firm Birla Surya plans to invest Rs54bn over
next  five  years  to  set  up  an  integrated facility for solar power
equipments. (BS)
‰ Lupin and Natco Pharma have entered into an alliance to market
a generic drug used for treating breast cancer, in the American
market. (FE)

BUY Hero Honda- Management meet update: Volume outlook remains strong:: Credit Suisse

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● We met Mr Ravi Sud, CFO of Hero Honda. He highlighted that on
the back of continued strong demand from semi-urban and rural
markets, sales growth momentum continues to be robust.
● The company has been reporting monthly sales at 0.5m for the
last three months, which has matched the retail offtake and dealer
inventory levels remain low (three weeks of sales). Management
maintained its 12-14% volume growth guidance for the year.
● With company’s mainstay semi-urban, rural markets little affected
by rate increases and driving industry sales, Hero Honda
continues to see market share gains. YTD market share is up 3%.
Company also plans to take 1-1.5% price increase this month to
offset the current commodity cost pressures on margins.
● Management is comfortable maintaining a high dividend payout
ratio given strong cash generation on the back of which we expect
ROEs to expand to 90%+. With its 6% dividend yield and robust
volume growth outlook, Hero Honda continues to be our top pick
in the Indian auto sector. Maintain OUTPERFORM.
● Hero Honda is a CS NJA Focus List stock.

Morgan Stanley:: Adani Enterprises - Coal Block Gets Environment Clearance

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Adani Enterprises Ltd  
Coal Block Gets Environment Clearance  
Quick Comment – What’s new: The Environment
Ministry has granted a Stage I clearance for Parsa Kante
block – a 15 MTPA coal block being developed by AEL
on a Mine Development Operator (MDO) model. There
had been dispute about whether the block came in a no
go area or not and the FAC (Forest Advisory Committee)
had rejected this block earlier.  However, the Minister
has overruled the rejection by the FAC giving out
reasons for granting the clearance (Exhibit 2).
Impact on AEL:  We were building in a 2-year delay
across all the coal blocks of AEL on the mine
development operator (MDO) business and hence this
clearance has no impact on our value / earnings for the
company.  However, given the struggle faced by
infrastructure developers on the ground in getting
environment clearances the market was reluctant to
ascribe any value to AEL’s MDO business.  Including
Chendipada block, which already has Stage I clearance,
50% of AEL’s coal mining operations now have Stage I
clearance, which we believe will be the trigger for the
market to start valuing this business.  
Next Steps for AEL: AEL will have to obtain Stage-II
approval, which is contingent on the state governments’
demonstrating full compliance with the provisions of the
Forest Rights Act, 2006.  AEL believes that they should
be able to start taking coal out of the block in the next 12
months (remaining time for land acquisition and setting
infrastructure for mining there).  
Investment thesis: AEL’s business focus on the energy
deficit theme, the scale already attained by its various
businesses, and its cash flow and earnings-driven
business make it our top choice to play the infrastructure
developer space in India.


Goldman Sachs- Construction: Infrastructure:: Is improvement in order inflow enough for sector to re-rate?

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Construction: Infrastructure
Equity Research
Is improvement in order inflow enough for sector to re-rate?
Significant slowdown in government capex, private capex flat
Our analysis of recent quarterly capex data from CMIE indicates a
significant slowdown in new capex investments, especially from the
government sector. New investments from the government sector over
Dec’10-Mar’11 are just 26% of the new investments over Dec’09-
Mar’10.Though we have seen a pick up in road award activity in Q1FY12,
the 3 quarters previous to that had also seen slowdown in transport
infrastructure projects, as well as government investments in the electricity
sector having been extremely poor over Sep’10-Mar’11. The private sector
has fared relatively better – with new investments (industrial and infra)
over Dec’09- Mar’10 down 21% yoy vs. govt. capex down by over 70%.
Pick up unlikely until structural issues are addressed
We remain skeptical of a pick up in order inflows in 2HFY12 on the back of
inflation and interest rates reversing. We believe the underlying reasons for the
weak capex and execution trends are structural as evidenced by weakening
data since the middle of last year (before cost of capital increased and before
political momentum was seemingly lost).
We believe addressing issues such as land acquisition, stable and fair
policies for infrastructure, consistent policy regarding environment and fuel
extraction (mining) could possibly return the capex cycle to growth levels
seen during 2005-2008. Lower cost of capital is a supporting element to the
capex cycle but would not a key enabler by itself, in our view.
Prefer companies with strong order books and WC efficiency
In the absence of any strong political consensus or debate evidenced so
far, we are not expecting solutions to structural issues to become evident
over the foreseeable future.
Hence, our preference in this uncertain environment is for companies with
– 1) Working Capital efficiency – enabling cash flow generation 2) Strong
order book coverage – providing visibility on growth and 3) Valuations that
are currently below historical median levels.
We continue to highlight L&T and BHEL for large cap exposure to the
sector (upgraded to Buy in Feb’11 and May’11 respectively). Our other
Buys are IRB, Sintex, NCC and ITNL.
Key Risks: 1) Aggressive bidding for orders 2) Volatile raw material prices

Maruti Suzuki India- Valuation looks fair after correction, still not compelling; Goldman Sachs

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Maruti Suzuki India (MRTI.BO)
Neutral  Equity Research
Valuation looks fair after correction, still not compelling; Neutral
What's changed
Maruti Suzuki stock price is down 17% post its FY11 earnings announcement
vs the Sensex down 7%, mainly driven by worsening domestic car market
conditions with increasing discounts in our view. The stock is now close to our
12-month FY12E P/E based TP of Rs1,173, with our price target valuation being
among the most conservative vs Street expectations (Bloomberg).
Implications
We believe that over last 12-month period changes in RoE account for >80% in
variation of MSIL’s stock price (see “Maruti Suzuki: RoE is a key driver of
valuation: significant upgrade cycle unlikely”, dated April 27 2011). Based on
this regression analysis, we believe the current stock price implies FY12E RoE
of about 12%-14% vs GSE 14.8%, closer to across the cycle returns enjoyed by
the global auto industry (though higher than  the about Japanese 10%
average in our view). However, over the next 12-24 months we believe
changes in RoE expectations will depend on the following: 1) Margins: we see
limited upside to our FY12-13E margins given: - A) permanent 2ppt increase in
royalty & R&D costs, with MSIL’s technology costs now being one of the
highest among Asian carmakers, in our view. We believe Maruti Suzuki may
have limited negotiating power with its technology supplier and parent,
Suzuki Motors in lowering royalty expenses significantly. B) A structural
increase in competition in the domestic car market, which combined with
slowing growth, may increase overall costs, threaten product pricing as well
as volume growth. 2) The asset turnover ratio which appears to be at an 8-
year peak could decline if demand growth further decelerates over FY2012-
13E.
Valuation
Stock is currently trading at 2.0x P/B vs the historical average of about 2.8x, its
historical trough of 1.5x and global peers trading at 1.8x. Our Neutral rating and
12-month FY2012E P/E-based TP of Rs1,173 remain unchanged.
Key risks
Higher/lower than expected demand and competitive pressure.
INVESTMENT LIST MEMBERSHIP
Neutral

India Equity Strategy - 2H11 Outlook: Buy India, Not the Mood Citi Research

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India Equity Strategy
 2H11 Outlook: Buy India, Not the Mood
 Sentiment is bad — India has been low on sentiment before; this time it’s a wide
combination of inflation, interest rates, government policy and action inertia, a capex
slump and downside risks to economic and earnings growth. Basically, it’s not hard to
see why India is one of the worst performing markets globally (-14.4% YTD).
 Corporates are reading the macro, but riding the micro — Bottom up, the picture
appears rather different. Most corporates suggest a certain caution over the next 1-2
quarters, but they continue to plan, invest and position for a more robust, longer-term
outlook. Also, consumer demand remains relatively positive. Adjusting for the increase
in interest rates, we see earnings growth remaining decent at 18-19%.
 Incremental macro pressures should ease – The macro problems – inflation, rates
and government inertia – are elevated and could have structural implications. Nor are
there enough signs to suggest a near-term reversal. However, we do not believe that
‘falling growth and higher rates’ go together. With slower growth now baked in, we
expect an easing in both demand-driven inflation and further rate pressures.
 Valuations more supportive — While India is still not conspicuously cheap, we see
the potential for strong returns in 2HY2011, given: 1) earnings multiples are at a 15%
discount to long-term averages; 2) interest rates are already high; 3) commodity
price/inflation pressures should ease; 4) India’s growth differential vs. the developed
world could rise; 5) history suggests a strong 2H performance; 6) sentiment could be
boosted by macro/government action. We target a Sensex level of 21500 by Dec 2011.
 Model Portfolio – Long Banks, Energy, Telecom, Pharma and Real Estate

News headlines : June 24: The Royal Bank of Scotland:

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News headlines
Oil & Gas  
Reliance Industries hits out at CAG over KG-D6 capital spending remarks (Economic Times)
Reliance Industries’ D1 and D3 gas fields costs rose $3bn in 2 years: CAG draft remarks
(Economic Times)
IEA announces 60mn barrel oil stock release (Business Standard)
Emergency meeting on fuel price hike today (Economic Times)
Banks
NPAs of banks likely to rise to 2.7% of advances in FY'12 (Economic Times)
Yes Bank hikes deposit rates by 25-50bp (Business Line)
Database not enough for solvency II (Business Standard)
Make public RBI advisory note issued to ICICI: CIC (Business Standard)
Pharma
Jubilant Biosys receives milestone payment from AstraZeneca (Economic Times)
Lupin, Natco tie up to market breast cancer tablets (Economic Times)
USFDA inspects Ranbaxy's new plant in Mohali (Economic Times)
Commodity
Coal India seeks Government nod to acquire unlisted firms (Business Line)
Europe and Indian operations get closer for Tata Steel (Business Standard)
IT & Telecom
16-18% IT export target this fiscal achievable: NASSCOM (Economic Times)
US growth forecast: Indian tech industry says no fresh worries (Business Line)
Bharti makes final payment of US$700mn to Zain (Economic Times)
Power, engineering & infrastructure
BHEL and BEL consortium to invest Rs20bn in AP (Economic Times)
L&T bags 4-laning project in Rajasthan India (Business Line)
Automobiles  
HIPL revokes 17.33% stake in Hero Honda (Economic Times)
M&M asks Maharashtra to keep commitments on incentives (Economic Times)
General Motors shelves small car project in India (Economic Times)
Suzuki CEO says Maruti strike was negligible (Economic Times)
Slowdown in the industry to hit Auto component makers (Economic Times)
Maruti lowers sales growth forecast (Business Standard)
Honda targets sale of 30,000 CBR-250R bike in India (Business Line)

Suzlon Energy - Understanding promoters’ pledge and client funding :: BofA Merrill Lynch,

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Suzlon Energy Ltd.
   
Understanding promoters’
pledge and client funding
„Promoters’ pledge of 65% of holding misunderstood; Buy
A 13% correction in Suzlon stock this week is an opportunity to Buy, in our
opinion, as we believe the market’s concerns about the promoters’ pledge of 65%
of their equity is exaggerated – ~75% of the pledge is held as a secondary
security for Suzlon’s capex / working capital loans and has no MTM risk, while
only 17% ownership, pledged to further the business of Suzlon’s promoters’, may
technically face MTM risk, but it is well covered by 35% unpledged equity. Also
visibility of funding at its #1 client, Caparo, improved with the raising of
US$112mn, enough to fund ~50% of its order on Suzlon. We reiterate our Buy on
Suzlon on a structural turnaround. Risks to our non-consensus Buy call are
delivery push-back due to macro, currency and execution.
Visibility improved on Caparo order with funding & sites
Caparo raised US$78.5mn (Rs3.5bn) of mezzanine funding with a likely addition
of US$33.5mn (Rs1.5bn), totaling US$112mn over and above the US$80mn
(GBP50mn) raised in the IPO. This will enable it to fund ~500MW (50%) of orders
placed with Suzlon. The execution of its 1GW order from Suzlon has started at a
Rajasthan site, with commissioning of five turbines (11MW) in 1QFY12 and 31MW
likely in July’11. Total revenue of Rs4.39/kWh, led by a 10% increase in feed-intariffs by Rajasthan, 4% additional incentive and Rs0.50/kWh of generation-based
incentives are core drivers of site selection. This validates our view of improved
regulation driving IPPs to enter the wind power market in India (read Suzlon).
Three catalysts to Buy Suzlon – A turnaround story
1.  25% CAGR till FY13E in the Indian wind markets on higher feed-in tariffs (offset rising interest cost/low wind sites) and new regulation-led entry of IPPs.
Its back-to-basics strategy has paid off - YTD orders up 4x in India to 2.1GW.
2. 28% PAT CAGR in REPower on shift in product-mix to high-margin offshore
wind and production of its largest-selling 2MW to low-cost countries, and
3. Recovery of Rs10bn (24% of debtors) in 2HFY12 (Edison), to fund growth as
the project is commissioned in 4QFY11 and is eligible for ITC incentives.


Price objective basis & risk
Suzlon Energy (XZULF)
Our PO of Rs75 is based on our sum-of-the-parts analysis. We valued Suzlon's
wind business at 14x 1-year forward earnings, at Rs71 per share, which is set at
a 20% discount to Indian capital goods majors and in line with European
comparables, which is above its historical average. This, we believe, is fair given
Suzlon's long-term growth led by BRIC countries, REpower and its return profile.
We value Suzlon's 26% stake in the gearbox business of Hansen at Rs4 per
share at BofAML's PO of GBp50.
Upside risk to our rating is de-leveraging by asset sales and a pick-up in USA
market, leading to new order wins. Downside risks: Headwinds for wind turbine
business on excess supply driving down ASPs and execution risk in the land
acquisition and grid connectivity in India.

Eros International Media – Getting 'Ready' for big releases ::RBS

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Eros begins FY12 with a strong release slate that should drive 30% top-line growth.
Realisations on TV licensing and new media are improving. We expect EBIT margin to rise
262bp as project costs are largely locked in. At 9.7x FY12F EPS, the stock looks attractive to
us given the FY11-13F PAT CAGR of 27%.

Strong big-ticket Hindi film slate to drive revenue growth in FY12
Eros’s FY12 release slate includes seven big-ticket films vs four in FY11. The film “Ready”
has made a good start, becoming one of the top-five all-time grossing Indian films. In addition
to more releases, drivers for higher realisation per film are in place: 1) more screen
coverage, with digitisation, and 2) higher TV licensing rates, with a significant portion presold. Also, better exploitation of the digitised library and secondary licensing of some older
titles could drive catalogue revenues. We forecast 30% revenue growth in FY12.
Margin expansion should continue in FY12, as budgets are still under control
Eros expanded EBIT margin by 491bp in FY11, due to success with big-budget film releases.
In addition, the full-year impact of the formal transfer pricing agreement for overseas rights
with its parent was felt in FY11. We expect continued margin expansion of 262bp in FY12, as
costs are expected to be stable (barring two large releases), while realisations are improving.
Comfortable balance sheet position provides significant headroom for growth
Eros raised Rs3.19bn through its IPO in 2010 and has already deployed about 60% in FY11,
including Rs970m repaid to its parent. The company had Rs1.1bn of net cash at the end of
4Q11. On a conservative net debt/equity of 0.5x, more than Rs4bn of additional debt could
be raised for current/future projects, not counting cash flow from FY12 releases. Hence, we

see room to add more releases. Our current FY12 forecast largely builds in only the announced
pipeline. Despite a large release slate in FY12, we see a window of opportunity in 2Q/4Q12.
Strong performance in next three quarters should drive valuation upside, in our view
The release of seven big-budget films should translate into strong growth in FY12 – we forecast
revenue and EBIT growth of 30% and 46%, respectively. We find valuation at 9.7x FY12F EPS
attractive in the context of our estimated 27% PAT CAGR over FY11-13. Any major new film/VFX
projects could drive further upside to our current forecasts.



Reliance Industries- Good news in E&P – discoveries in 2 new blocks since April ::BofA Merrill Lynch,

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Reliance Industries Ltd.
   
Good news in E&P – discoveries
in 2 new blocks since April
„First discoveries in new eastern offshore blocks since 2008
Hardy Oil, partner of Reliance Industries (RIL) in deepwater block KG D9, has
reported the first gas discovery in KG D9. Its commerciality is being ascertained. In
April 2011, RIL had also reported a gas and condensate discovery in the first well
drilled in deepwater block CY-PR-DWN-2001/3 (Cauvery-Palar basin). These are
RIL’s first discoveries in new blocks in the eastern offshore region since February
2008 (KG D3). If these discoveries prove to be commercial and significant in size, it
will help re-rate RIL’s E&P. RIL has 22 blocks in the eastern offshore region. It has
now drilled in 10 and made discoveries in 9. The first well in Mahanadi D4 (reserve
potential 100tcf) may be drilled in FY12. We retain our Buy rating.
Discovery just 7% of risked prospective resources in KG D9
The initial estimate of unrisked prospective resources in KG D9 was 54.8tcf
(risked 10.6tcf). After the first well drilled in Oct. 2009 was dry, the independent
expert-certified prospective resources estimate was cut to 29.5tcf (risked 5.2tcf).
After the second unsuccessful well in January 2011, estimates were further cut to
27.6tcf (risked 4.7tcf). The successful well is in a prospect (A2) that accounts for
just 7% (345bcf) of the risked prospective resources of 4.7tcf in KG D9.
Clarity on KG D6 2P reserve cut soon; 2C may rise
On June 13, Niko Resources (Niko) said that its 2P reserves had been cut by 18%
(no asset wise break-up). Clarity is expected on June 24. We have already cut 2P
reserves in KG D6 by 600bcfe, but the worst-case cut could be 2.7tcfe. The
impact of the cut on RIL’s NPV would be relatively low, as, at peak, the govt’s
share of profit petroleum in KG D6 is 85%. Also, 2C contingent resources (7.2tcf)
in KG D6 may rise, as the 2C number reflects only 14 of the 20 discoveries made.

Satyam Computer Services - Recovery on track :target Rs100:Standard Chartered Research,

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 Satyam's analyst meeting, first post the 2009
management change, highlighted the stabilising
business/operating profile.
 Revenue momentum is strong; improving large deal bid
participation could reflect in financials by 4QFY12.
 Room to improve margin further but expansion post the
sharp jump in 4QFY11 could be slow.
 Our May-11 upgrade theme ‘volume recovery = margin
expansion, best played organically’ remains on track.
 Reiterate OUTPERFORM with 19% potential upside

Risk flight hits gold; Greece likely to dominate the market  HSBC Research

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Risk flight hits gold; Greece likely to dominate the market
 Bullion slide continues as markets remain focused on
Greece, the EUR and risk; if an agreement appears close on
Greece, a recovery in risk assets would be gold-friendly
 Further EUR weakness may undermine gold but the selloff
may encourage emerging markets demand around
USD1,500/oz, notably but exclusively from India
 The slide in PGMs is making both platinum and palladium
attractive but buying interest may be hard to generate

RELIANCE INFRASTRUCTURE: Mumbai distribution assets to stay :Edelweiss

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Our interactions with Reliance Infrastructure’s (RELI) Mumbai distribution
heads indicate that as per Solicitor General of India (SGI) the new
licensee has to develop an independent network for electricity
distribution. This, in addition to MERC’s recent public notice inviting
comments/suggestions to renew RELI’s Mumbai licence, is likely to
eliminate the overhang on the stock with respect to Mumbai regulated
business.
SGI opinion: Any new licensee will have to lay own distribution
network
Distribution assets will continue to remain with RELI regardless of the status of
license. If the license is not renewed, then RELI will be unable to distribute power
within Mumbai from August 16, 2011 (expiring on August 15, 2011). No applicants
have been granted new licenses either. Moreover, as per SGI, any new licensee can
only distribute power using its own distribution network or through open access
(currently available for only >1 MW). Even if open access is allowed for less than 1
MW (by changing the law), the new licensees will have to use RELI’s network by
paying a wheeling charge. A new network, change of law and negotiation of
wheeling charges are all time consuming processes. Given these constraints and
the little time left till August 15, 2011, it appears imperative that RELI’s license
would be renewed by MERC.
MERC issues public notice for renewal of RELI’s Mumbai license
It appears that MERC, being cognizant of the above, is also of the view that RELI’s
license be renewed. MERC has recently issued a public notice in newspapers
inviting objections (if any) to renew RELI’s Mumbai power distribution license within
July 09, 2011.
Outlook: License renewal imperative
Even in the unlikely case of RELI’s license not being renewed, it will still retain
ownership of its assets which it can either surrender at the highest bid value (market
value) or offer to other licensees for open access. This would ensure that earnings from
Mumbai power business are sustained. We find these developments to be positive for
the stock and maintain ‘BUY/Sector Outperformer’ recommendation/rating on it.

Momentum on retail price hikes builds; any surprise govt. action can materially impact PSU oil stock:: Credit Suisse

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● CNBC reports suggest the oil ministry has asked the govt. for
relatively large price increases: (1) Rs4/ltr for diesel, (2)
Rs150/cylinder for LPG and (3) Rs9/ltr on Kerosene. Given
inflation and the current political issues, these seem unachievable,
but we note that the petroleum ministry has not been as
aggressive in its requests before. The off-chance that a
reasonable part of these are implemented can impact oil company
stocks near term.
● Along with the requested import duty reductions, these can reduce
FY12E losses of around Rs1,633 bn by Rs518 bn (or 32%;
assuming crude at US$110/bbl). If only diesel prices went up by
Rs4/ltr, savings would be a smaller Rs$208 bn. With the monsoon
session of parliament starting early August, the government is
running out of time in which price hikes can be affected, near term.
● Without policy reform/regulation, it is difficult to argue for
fundamental upside to IOCL/BPCL/HPCL. Yet the stocks can
trade well around (large) price hikes. ONGC theoretically ‘earns’
33% (or more) of savings from price increases, but needs clarity
on long-term subsidy sharing mechanisms. Any surprise increase
in LPG prices would benefit GAIL